Oda Russian Commercial Law 2007-1
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1.Individuals and juridical persons are free to conclude a contract. Compulsory conclusion of a contract is not allowed except in cases where it is provided by the present Code or law, or by a voluntarily assumed obligation.
2.Parties may conclude a contract which is provided or not provided by law or other legal acts.
3.Terms of the contract are determined by the discretion of the parties except in cases where the content of the terms are determined by law or legal acts.
Freedom of contract in the Russian Civil Code, as in other jurisdictions, encompasses i) freedom of concluding a contract, ii) freedom of choosing the counter party, and iii) freedom of determining the terms of the contract.
In the socialist period, freedom of contract did not exist. Contracts between enterprises (they were called plan-contracts) were subordinated to the state economic plan. Under the dominance of the state economic plan, enterprises had no choice but to conclude contracts with a speci c party dictated by the plan. The parties were not free to negotiate the terms of the contracts, nor even the price. In fact, there was a procedure at the then State Arbitration Commission (gosarbitrazh) to compel the parties to conclude a contract.
Naturally, freedom of contract has its limits even under the present Civil Code, as is the case in other industrialised countries. In Russia, freedom of contract exists with the following exceptions:
Firstly, the Code has a concept of “public contracts”. This is a new concept which was rst introduced by the Law on the Protection of the Rights of Consumers of 1992 and now accommodated in the Civil Code.2 Public contracts are contracts concluded by commercial organisations which establish the duty of the organisation to sell goods, provide service or work. The organisation, by nature of its activities, must perform for everybody who turns to it for such goods, work or service. Examples of these activities include retail trade, public transportation, communication, energy, medical services and hotels (Art.426, para.1). The uniqueness of public contracts lies in that i) commercial organisations are not entitled to refuse the sale of goods, the provision of work or services other than in instances provided by law (ibid., para.3), ii) the price of goods, work, or services and the terms of contract should be the same for all, unless the law allows preferential terms to be applied to a speci c category of consumers (ibid., para.2), and iii) in case of refusal on the part of the commercial organisation to conclude a contract, the organisation may be forced by law to conclude it. In addition to the public contracts, government supply contracts can put selected Russian
2Law 2300-1 of February 7, 1992.
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companies under an obligation to conclude a contract with the government and supply goods or provide services.
Secondly, there are standard form contracts which also substantially limit freedom of contract. Standard form contracts are those contracts whose terms are determined by one of the parties in a standard form and can be accepted by the opposite party only as an “attachment/adhesion” to the entire contract (Art.428, para.1). The Civil Code provides some protection for consumers from standard form contracts. The counter party in a standard form contract may demand rescission or alteration of the contract if the it deprives this party of the rights normally provided in this type of contract, excludes or limits the liability of the other party for the breach of an obligation, or includes other disadvantageous terms which this party, based upon his reasonably understood interest, would not have accepted had he been given an opportunity (ibid., paras.1 and 2). This applies even when the contract is not against the law or legal acts. Since this provision aims to protect individuals (consumers), it is not applicable if the contract involved entrepreneurial activities by the opposite party and this party had known or should have known under what terms the contract was concluded (ibid., para.3).
Thirdly, contracts must conform to the mandatory provisions of the law and other legal acts valid at the time of the conclusion of the contract (Art.422, para.1). Other legal acts in this context are presidential decrees and government edicts as well as subordinate acts enacted by ministries and agencies. A similar provision concerning juridical acts exists in the General Part (Art.168). However, this provision in the contract law part is slightly different in that it refers to the law and legal acts valid at the time of the conclusion of the contract. This means that if a law which was adopted after the conclusion of the contract has a mandatory provision different from the law existing at the time of the conclusion of the contract, terms of the contract retain the effect insofar as the new law does not provide for retrospective effect (Art.422, para.2). A similar “grandfathering clause” concerning tax and other mandatory payments exists in the amended Foreign Investment Law in relation to major projects (Art.9). It is not clear why contracts are treated differently from juristic acts in general.
3CONCLUSION OF A CONTRACT
A contract takes effect and becomes binding on the parties from the time of its conclusion (Art.425, para.1). A contract is deemed to have been concluded if an agreement with all the essential terms of the contract has been reached in the required form between the parties. Essential terms in this context are the terms of the object (subject matter) of the contract, terms which are determined as
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essential by law or legal acts, terms necessary for the given type of a contract, as well as other terms, to which agreement is required by one of the parties (ibid.). Acontract is concluded by the offer of one party and the acceptance by the other (ibid., para.2).
An offer is a presentation to one or several persons which is suf ciently de - nite and re ects the intention of the offeror to regard a contract to be concluded upon acceptance by the opposite party. The offer must contain the essential terms of the contract (Art.435, para.1). The offer binds the offeror from the time it was received by the offeree (ibid., para.2). An offer which has been received by the offeree cannot be withdrawn by the offeror for the period established in the offer for its acceptance, unless otherwise reserved in the offer, or unless the withdrawal emanating from the nature of the offer or the circumstance in which the offer has been made (Art.436).
Acceptance is a response by the offeree to accept the offer. The acceptance has to be in its entirety and without reservation.As a rule, silence is not an acceptance.Acts on the part of the offeree which execute the terms of the contract, such as accepting the goods, providing services etc., within the period of acceptance is regarded as acceptance unless otherwise provided by law, a legal act or the offer itself. Acceptance can be withdrawn until it has reached the offeror (Art.438). If the period of acceptance is xed in the offer, the contract is concluded when the offeror receives the acceptance from the offeree within this period (Art.440). If a period of acceptance is not xed in written form, the contract is concluded if the offeror received the acceptance within the period established by law or a legal act, and if such a period does not exist, within the period normally needed for the acceptance (Art.441, para.1). If the offer has been made orally without indicating the period for acceptance, the contract is considered to be concluded if the offeree immediately expresses its acceptance (ibid., para.2).
4INTERPRETATION OF CONTRACTS
Following the model of the 1990 Fundamental Principles of Civil Legislation of the USSR, the Civil Code has a provision on the interpretation of contracts. The Code provides that rst, the literal meaning of the words and expressions in the contract should be considered. If this fails, the meaning of the term should be established from other terms and conditions of the contract and the meaning of the contract as a whole (Art.431).3
3For details, see Braginskii and Vitrianskii, supra, pp.266-274.
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An open joint stock company, Krap (lessor), brought an action against a closed joint stock company, Konfort-servis (lessee).
The parties concluded a contract of lease. The contract provided that the rent was to be indexed to the rise in the tariff for electricity. Whether this meant that the rise in the tariff was linked merely to the part of the rent covering the electricity, or the rent as a whole was unclear. The commercial court found the latter to be the case, since this clause was accommodated in the part of the contract entitled “the amount of rent and the procedure of payment” and because the “words and expressions contained in this part gave a basis for the conclusion that this part provided for the mechanism of the increase of rent, and not merely the increase of the electricity payment”.4
If this method is not suf cient to ascertain the content of the contract, then, the actual common intention of parties should be clari ed by taking into consideration the purpose of the contract. In such cases, all appropriate circumstances, including the negotiations which preceded the conclusion of the contract, and communications as well as the practice established between the parties, trade custom and subsequent conduct of the parties are to be taken into account (ibid.).
A military procurator brought an action against an investment-construction company, Khabarovskinveststroiservis, on behalf of the Housing Administration of the Far East Military Division. The Administration and the company concluded a contract of joint participation in the construction of an apartment block. The company was under an obligation to pay 551.4 million roubles and to provide 10 ats (3 two bedroom ats, 5 three bedroom ats, and 2 four bedroom ats) of a total of 919 square metres to the administration, but in reality, 10 ats of only total 685 square metres were provided. The administration brought an action to have the remaining space transferred, or compensation to be paid.
The rst instance court ordered the defendant to provide another 234 square metres of space. The appellate court quashed this decision on the ground that the contract had been fully performed. The court of cassation upheld this. The Supreme Commercial Court upheld this decision on the following grounds.
The contract provided that the administration was to provide nance to buildve ats each in two buildings. These buildings contained no at the total size which amounted to 919 square metres, which was contrary to what was stipulated in the contract. The court of cassation had rightly concluded that there was a contradiction concerning the object in the contract. By virtue of Article 431 of the Civil Code, as the meaning of the contract was unclear, the meaning needed to be established by
4Decision of the Presidium of the Supreme Commercial Court, February 18, 1997, Case 1852/96.
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other terms of the contract and the contract as a whole by taking into account various documents. The conclusion of the court of cassation was that the obligation under the contract was to transfer 10 ats.
The court found that the contract merely obliged the owner to transfer 10 ats (3 two bedroom ats, 5 three bedroom ats, and 2 four bedroom ats) in the two buildings located in the given addresses. This obligation had been performed by the defendant. The decision of the court of cassation was upheld.5
5REVISION AND RESCISSION OF A CONTRACT
As a rule, revision and rescission of a contract is possible by agreement of the parties, unless law or the contract itself provides otherwise. The Code provides that a contract can be revised by the judgment of the court upon application of one of the parties only when there was a substantial breach of contract by the opposite party and on other occasions as provided by the Civil Code, law or the contract. “Substantial breach” means a breach “which causes the other party to suffer a loss which signi cantly reduces what this party may legitimately expect by concluding a contract” (Art.450, para.2).Another provision of the Civil Code prohibits the unilateral refusal of performance or the unilateral change of obligations (Art.310).
On this matter, the Supreme Commercial Court has published a “Review of the Court Practice of Settling Disputes involving Conclusion, Revision, and Rescission of Contracts”.6 Thus, for example, the failure of the buyer to pay for real property as provided in the contract of sale is a substantial breach of a contract. Similarly, a failure to pay for a privatised object is a ground for a unilateral rescission of the contract of privatisation. Failure on the part of the contractor to complete the construction work within the agreed time limit and exceeding the projected cost were found to be grounds for rescission of the contract. On the other hand, in a case where the lessee repeatedly failed to pay the rent, make repairs, and even subleased the property without the consent of the lessor, the defendant submitted evidence that the breach had been recti ed within a reasonable period. The court dismissed the claim of the lessor to rescind the contract.
Commission for the Administration of State Assets of Tatarstan brought an action against a closed joint stock company, Tatintreid, for the rescission of the contract of sale of the shares of a kombinat and the return of the shares. Shares of the kombinat were sold to the defendant as a result of an investment tender. The shares were
5Decision of the Presidium of the Supreme Commercial Court, June 17, 1997, Case 1063/97.
6Information letter of the Presidium of the Supreme Commercial Court, May 5, 1997, No.14.
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sold to the defendant upon the order of the Commission. One of the terms of the tender was for the successful bidder to nance the modernisation of the Kombinat at the cost of 5.3 billion roubles. It was provided in clause 1.3 of Part 1 of the sales contract. Since the buyer failed to ful l this obligation, the Commission brought an action in court.
The rst instance court as well as the court of cassation found that the term of the contract regarding the investment for modernisation should be regarded as essential, and the breach of this term by the defendant is a suf cient ground for the rescission of the contract in accordance with Art.450 of the Civil Code.7
If a creditor fails to accept the performance of an obligation without justi able reason, this serves as a ground for rescission by the counter party:
Ajoint stock company brought an action against a limited liability company in order to rescind the contract of sale of a non-residential property for the failure of the defendant to pay the price. The court dismissed the claim, since it was ascertained that the plaintiff/seller had failed to accept the payment by the buyer and the buyer had deposited the amount. By virtue of Article 327, para.1 of the Civil Code, if an obligation cannot be performed due to failure on the part of the creditor to accept performance, the amount in question can be deposited with a public notary.8
A contract can be revised or rescinded on the ground of the change of circumstances. The relevant provision (Art.451, para.1) states as follows:
Asubstantial change of circumstances on which one of the parties relied at the time of the conclusion of the contract is a ground for the revision or rescission of the contract, unless otherwise determined by the contract or unless this emanates from the nature of the contract.
A change of circumstances is substantial if the circumstances changed to the extent that if the parties were reasonably able to foresee it, they would not have concluded the contract or they would have concluded the contract under substantially different terms.
There are four basic requirements for the application of this provision:
i)at the time of the conclusion of the contract, the parties relied on the fact that no such change of circumstances would occur;
7Decision of the Presidium of the Supreme Commercial Court, April 13, 1999, Case 6685/98.
8D.V.Muzin ed., Grazhdanskii kodeks Rossiisokoi Federatsii s postateinymi materialami iz praktiki VAS RF, Moscow 1999, p.469.
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ii)the change of circumstances was the result of a phenomenon which, after it had happened, was insurmountable by the interested party despite the care and alertness which are required of this party by the nature of the contract or the terms of business;
iii)the performance of the contract without revision of its terms harms the relationship of the proprietary interest of the parties and results in a loss on the part of the interested party to such an extent that this party would be deprived of what he had legitimately expected on concluding the contract;
iv)it cannot be derived from trade custom or the substance of the contract that the risk should be borne by the interested party.
This provision is a novelty which was introduced for the rst time by the present Civil Code. Since the concept of change of circumstances is not common in the Anglo-American jurisdiction, when this was introduced, some US lawyers were apprehensive, since it was suspected to be an attempt to reduce the binding effect of contracts. However, this concept is familiar to lawyers in Civil Law countries. In fact, the Swiss Civil Code has long had this concept, and so has the Dutch Civil Code which served as a model for the Russian Civil Code. A Russian expert points out that this has been recognised as “one of the most important principles of contemporary contract law”, which is demonstrated by the fact that it is incorporated in the “Principles of International Commercial Contracts” prepared by UNIDROIT.9
The effect of the change of circumstances is that the parties are able to renegotiate the contract in order to bring it in line with the changed circumstances or to rescind the contract if they fail to reach an agreement. If one of the parties brings thecasetothecourtforrescissionofthecontract,inprinciple,thecourtmustallow therescissionofthecontract.10 Ontheotherhand,thecontractcanberevisedbythe court in exceptional circumstances where rescission of the contract is against the interests of society or where it results in a loss to the parties that signi cantly exceeds the cost necessary for performing the contract under changed circumstances (Art.452, para.4).
The commercial court has been cautious in acknowledging that a change of circumstances has occurred. In several cases, the court denied the application of this provision to a lease agreement, where the revision of the rent due to the increase of the cost was at issue.11 In another case, the court denied that the bankruptcy of the creditor was a change of circumstances.
9A.S.Komarov, “Izmenenie obstoiatel’stv i dogovornoe otnoshenie”, in A.L.Makovskii ed.,
Grazhdanskii kodeks Rossii, Moscow 1998, pp.337-348.
10Ibid., p.350.
11Decision of the Presidium of the Supreme Commercial Court, January 12, 1999, Case 6548/98.
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The bankruptcy administrator of Tserta Bank, brought an action against a limited liability company, Firma BAK, in order to have the loan agreement of February 9, 1998 rescinded and the amount of the loan, 300,000 roubles, and the interest, 33,750 roubles, retrieved from the defendant (borrower). In this case, the Bank had provided a loan over ve years with 5% interest to Firma BAK. The rst instance court acknowledged the claim and the appellate instance as well as the cassation instance court upheld the judgment. Upon the protest of the deputy president of the Supreme Commercial Court, the Supreme Commercial Court reversed the judgment. Tserta Bank was declared bankrupt after the conclusion of the loan agreement. The Bank applied for rescission of the loan agreement on the ground that the bankruptcy of the Bank was a substantial change of circumstances. However, in the view of the Supreme Commercial Court, the lower courts failed to take into account the fact that the payer of the promissory note was not the Bank. Furthermore, the contract can be rescinded only when the four requirements set out in Article 451 are met. Bankruptcy of the creditor which occurred as a result of a risky credit policy does not qualify as a change of circumstances resulting from a cause which the interested party, in this case, the Bank, could not have overcome with due care. Therefore, Article 451 is not applicable in this case.12
In yet another case, the Supreme Commercial Court rejected the claim of the party for the revision of a construction contract due to the increase in the price of materials. The Court ruled that in order to revise the terms of the contract, all four requirements of Article 451, para.2 should be met, and in addition, pointed out that revision of the contract was possible, in accordance with para.4, only in exceptional cases where rescission of the contract is against the interests of society or where it results in a loss to the parties that signi cantly exceeds the cost necessary for performing the contract under changed circumstances.13
In order to claim revision or rescission of a contract, the interested party must rst propose such a revision or rescission to the opposite party. Only when the interested party receives a refusal to revise or rescind the contract from the counter party, or fails to receive a reply within the period determined by law or a contract, or in the absence of such a period, within 30 days, can he apply to court for revision or rescission (Art.452).
Revision or rescission of a contract takes effect from the time of the agreement by the parties, or, in cases where the revision or rescission is made by court procedure, from the time the judgment enters force.As a rule, the parties are not entitled to demand the return of that which has been transferred to the opposite party as performance of obligations up to the time of the revision or rescission
12Decision of the Presidium of the Supreme Commercial Court, June 15, 1999, Case 1020/99.
13Decision of the Presidium of the Supreme Commercial Court, October 6, 1998, Case 249/98.
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of the contract (Art.453, para.4). However, if a substantial breach of contract by one of the parties has served as a ground for revision or rescission of a contract, the opposite party is entitled to claim damages for revision or rescission of the contract (para.5).
6INDIVIDUAL CONTRACTS
1)General
Part Two of the Civil Code covers individual contracts, tort and unjust enrichment. There are 28 types of contracts in total provided in the Code ranging from sale, exchange to public tender and even betting. These include contracts which are normally concluded between individuals and also commercial contracts which have entrepreneurs involved. In fact many of the commercial contracts, i.e. contracts in which at least one of the parties is an entreprenuer such as factoring, nancial lease, franchising and management of assets (trast) have been newly incorporated in the Code. The problem is that provisions on some of those contracts such as nancial lease are not necessarily well thought through.
The list of contracts is not exclusive. Based upon the principle of freedom of contracts, parties are free to conclude a contract which is not directly provided by law (anonymous contracts), unless it is against the law. Parties may also conclude a contract which encompass different types of contracts as provided by law and other legal acts (mixed contracts).
Many provisions of the part of the Code on contracts are of an optional nature, i.e. it is possible to provide otherwise by agreement of the parties.
2)Contract of Sale
(1)Types of Sales Contracts
Acontract of sale is de ned as a contract in which the seller is obliged to transfer the ownership of a thing (goods) to the buyer, while the buyer is under an obligation to accept it and pay the price (Art.454, para.1).
The contracts of sale part of the Civil Code starts with a general part which sets out rules which are applicable to all kinds of contracts of sale. This is followed by speci c types of sales contracts such as i) retail contracts, ii) supply contracts, iii) government procurement, iv) supply of agriculture products (kontrataktsiia), v) energy supply contracts, vi) sale of immovables, and vii) sale of enterprises.
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A retail contract is a contract in which an entrepreneur in retail sales, sells goods for personal, family, domestic, and other use not related to entrepreneurial activities. It is a “public” contract, i.e. the seller is not allowed to refuse entering into a contract if someone makes an offer. Supply contracts are those on which the supplier/entrepreneur supplies goods to another person for entrepreneurial activities or other purposes not related to personal, family, domestic purposes.
Government procurement (supply of goods for government needs) covers both contracts with the Federal government and the constituent entities of the Russian Federation. Government procurement is effected in two forms: agreement (kontract) with the state for the needs of the state, and the state supply contract (dogovor) concluded in accordance with the former (Art.525, para.1). The former can be compulsory on the counter party, i.e. the counter party may not be entitled to refuse to supply. This is allowed only when provided by law, and on a compensation basis (Art.526, Art.527, para.2).
(2)General Rules on Contract of Sale
(1)Object of Sale
The object of sale can be anything which is regarded as an object of civil law rights in the Code, except for those excluded from circulation or whose circulation is restricted (Art.129, para.1). It should be noted that land and other natural resources can also be objects of sale to the extent it is allowed by laws regarding land and other natural resources (ibid., para.3).
A contract of sale can be concluded regarding the goods of which the seller is in possession at the time of the conclusion of the contract as well as the goods which are to be acquired by the seller in the future (Art.455, para.2).
(2)Performance and Acceptance
The obligation on the part of the seller is regarded to be performed at the time of either (i) delivery of the goods to the buyer or to the person designated by the buyer, if the buyer is under obligation to deliver the goods by the contract, or (ii) providing of the goods for the disposal of the buyer, if the goods, by contract, are to be transferred to the buyer or a person designated by the buyer at the location of the goods. In the latter case, goods are regarded to be provided for the disposal of the buyer when the goods are ready at the time and place determined by the contract and the buyer is noti ed of the readiness of the goods in accordance with the terms of the contract (Art.458, para.1).
If the seller fails to transfer the goods to the buyer, the buyer is entitled to refuse performance of the contract on his part. If the seller refuses to transfer an individually speci ed thing, the buyer may claim damages (arts.463 and 398).